How to Invest In & Understand the Stock Market

by Mike Parker

Only member brokers are allowed to trade stocks on the floor of a stock exchange.

The American stock market traces its history to 1792 when a group of 24 New York stockbrokers signed the Buttonwood Agreement. The meeting took place underneath a buttonwood tree at 68 Wall Street, and the ensuing agreement became the foundation for the New York Stock Exchange. If you are going to invest in stocks, it's a good idea to understand how the stock market works.

Participants

Participants in the stock market include investors, brokers and exchanges. Investors are the individuals or institutions that wish to buy or sell a particular security. Brokers act as intermediaries between the buyers and the sellers. Exchanges are the markets where investment transactions take place. The Securities and Exchange Commission recognizes 15 national securities exchanges in the United States, including the New York Stock Exchange, the NASDAQ and the Chicago Board Options Exchange.

Double Auction Market

The stock market acts as a double auction market. A buyer may offer to purchase a security for a set price, referred to as the bid price. A seller may offer to sell the same security for a set price, referred to as the ask price. When the bid price and the ask price come into agreement, the trade is made. If neither the buyer or seller is willing to meet the other's price offer, no trade will take place. Buyers and sellers may enter their orders at-the-market. These orders will execute at the price available at the time the order is entered.

Commissions

Only member brokers are allowed to trade securities on the floor of an investment exchange. To trade stocks or other investments, you must have an account with a member broker. Your broker, who may be referred to as a registered representative, will enter your orders on your behalf. These transactions may appear completely transparent, particularly if you have on online trading account. You will owe commissions or transactions fees on your investment trades in addition to any amounts you pay for your securities.

Risk

You typically buy stock or other investments with the expectation of the security increasing in value. But remember, you are in a double auction market, so you are buying the security from an investor who is equally convinced the security is going to decrease in value. The bottom line: While there are potential rewards for investing in the stock market, there are also significant risks. You could lose some or all of your investment.

Resources

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.